From the tree-ringed campus of Birzeit University, a narrow road leads deep inside the rocky valleys of the West Bank to the small, unexceptional Palestinian village of Kobar. It is home to a few thousand people, dotted with a handful of schools and mosques.

At one whitewashed house, off the main road at the entrance to the village, there is a carefully tended garden, with stone walls, a small lawn, bougainvillea and citrus trees. Here Atif Barghouti sat in the winter sunshine trying to make sense of the wash of rumours that suggested his younger brother, Kobar's most famous son, might be on the verge of release from jail, a release that might just revitalise the fractured and demoralised Palestinian national movement.

For now his brother, Marwan Barghouti, the Palestinians' most popular potential leader, sits several miles to the west, a resident of cell number 28 in Block Three of Israel's Haderim prison, where he is serving five life sentences for five counts of murder.

In the past week there has been an apparent burst of progress in the protracted negotiations between Israel and the Palestinian Islamist movement, Hamas, over a vast prisoner swap. Under the developing deal, mediated by German intelligence officers, Hamas would hand over Gilad Shalit, an Israeli soldier captured near Gaza in June 2006, in return for the release of perhaps 1,000 Palestinians from Israeli jails. Several senior Palestinian officials say Barghouti's name is top of the list of those to be released. If the deal goes ahead, it would be Israel's biggest prisoner swap in more than 20 years. The freeing of Barghouti could also be a watershed in the history of the Middle East conflict.

Atif Barghouti, 60, said that there were "encouraging signs" and he was "optimistic", but that he had heard such rumours many times before. The village itself shows no sign yet of a welcome party, save the odd line of graffiti sprayed on the walls referring to Barghouti by his nickname: "We will never forget you, Abu Qassam."

Barghouti is sometimes described by outsiders as a Nelson Mandela for the Palestinians. He doesn't consider himself so. Once he said of himself: "I am simply a regular guy from the Palestinian street advocating only what every other oppressed person has advocated – the right to help myself in the absence of help from anywhere else."

"Marwan doesn't hold a magic wand in his hand," said his brother. "But he is not a dirty person; his hands were not polluted by corruption or politics. And he is on the Hamas list of prisoners not because of his blue eyes, but because he is a national leader and has proved himself beyond doubt."

One of seven brothers and sisters, he was born into a poor family in a small, old house in the village centre. "Since he was 16 or 17 he possessed a strong personality, a strong will," said his brother. At 18 he was arrested by the Israeli military for the first time. He was in his early 20s when construction began on Ateret, a Jewish settlement built 10 miles inside the West Bank, overlooking Kobar. The rows of heavily guarded, red-roofed, Swiss-chalet-style homes, all illegal under international law, only underscore the reach of Israel's occupation and its colonial settler project.

Prison delayed Barghouti's education by several years, but he attended Birzeit University, where he was deeply involved in the Fatah student wing. He was then punished for his role in the first Palestinian uprising, the intifada of 1987, with deportation to Jordan for seven years. He welcomed the Oslo peace accords and met many times with Israeli politicians and peace activists, always campaigning for a two-state peace deal. But until his last arrest he also led the Tanzim, Fatah's military wing, through the start of the much more deadly second intifada.

Beyond his obvious popularity, Barghouti, 50, is important on two counts. First, he is the one Palestinian figure who is most likely to bridge the bitter divide between the rival factions of Hamas and Fatah. In jail in mid-2006 he helped author the Prisoners' Document, outlining a rapprochement between the two factions in which Hamas was finally to adopt Fatah's long-held support for a two-state peace deal.

Second, Barghouti advocates a parallel policy of negotiations with Israel together with "resistance". Given that the Palestinians have been in negotiations since 1991 and have so far failed to achieve the promise of independence, his more assertive approach resonates deeply with his people.

Ten days ago Barghouti wrote to a journalist from his prison cell outlining his position: "Betting on negotiations alone was never our choice. I have always called for a constructive mix of negotiation, resistance, political, diplomatic and popular action." He now seems to favour civil disobedience and non-violent protests, similar to those held every week against the West Bank barrier, but he also insists on the right to an armed struggle, within the occupied territories and directed against Israeli soldiers and settlers.

Barghouti was convicted in May 2004 for his role in three separate attacks that left four Israelis and a Greek Orthodox monk dead. The judges said he provided weapons and money for the attacks, but for the most part did not have direct contact with those carrying out the killings.

He was also given two consecutive terms of 20 years for a failed car bombing at a shopping centre in Jerusalem and membership of a banned "terror organisation", Fatah's al-Aqsa Martyrs Brigade, which was responsible for many suicide bombings. His justification for attacks on Israeli troops and settlers as "legitimate resistance" caused outrage among the Israeli public.

In the first attack in June 2001, two Palestinian gunmen ambushed a car in the West Bank, killing the driver, a Greek Orthodox monk who may have been mistaken for a Jewish settler. The second attack was another ambush in January 2002, in which an Israeli driver who had stopped at a petrol station was shot dead near Givat Ze'ev, a Jewish settlement in the West Bank. The third attack was in March that year, when a Palestinian armed with grenades, knifes and an assault rifle killed three Israelis eating at a popular Tel Aviv seafood restaurant. Barghouti was acquitted of involvement in 21 other murders.

Unlike many other Palestinians, Barghouti was tried, convicted and sentenced in the Tel Aviv district court, not a military court. The case was heavily publicised, with televised broadcasts, and was regarded by Israelis as crucial in breaking the back of the uprising and the wave of killings and bombings it brought with it. That was only five years ago, for some too short a time to overturn his sentence.

Arguably the current division between the Palestinian factions works in Israel's interests and Barghouti's commitment to draw Fatah and Hamas back together might represent a serious strategic threat. Many in Israel's intelligence agencies apparently think so.

Last week Silvan Shalom, a deputy prime minister, said categorically that Barghouti would not be freed. In August, even Tzipi Livni, the former foreign minister and now head of the centrist opposition Kadima party, spoke out against his release, citing his conviction and sentence. That came just days after Barghouti won, in his absence, election to Fatah's top central committee. "The fact that the Palestinians elected him or that someone here in Israel thinks that he can be a partner is not a sufficient excuse for his release," she said.

Rami Igra, a former senior officer in Mossad, said any prisoner swap would be "shameless and bottomless surrender" to Hamas. "Imagine the day after: the Hamas government will be crowned in victory and will link up with the extremist leader Barghouti and adopt the idea of Israel's destruction," he wrote in the Israel Hayom newspaper last week. Such voices often drown out those of other Israelis who have suggested his release might, on the contrary, herald the long-imagined historic deal that sets the Middle East at peace. The late respected Israeli defence analyst Ze'ev Schiff once described Barghouti as a "charismatic, popular and worthy Palestinian negotiating partner". Gush Shalom, the Israeli peace movement, placed an advert in Friday's Ha'aretz that read simply: "Freeing Gilad Shalit is a moral act. Freeing Marwan Barghouti is a wise act."

It was lunchtime on 15 April 2002, at the height of the second intifada, when Israeli special forces tracked Barghouti to the house of a friend in Ramallah. He was eventually arrested, walking out with his hands up, along with his cousin and with the owner of the house, Ziad Abu Ain, a senior Fatah figure and fellow former prisoner who was once deported from the US.

Today Abu Ain is a deputy minister in the Palestinian government in the West Bank. He believes the return of Barghouti to active political life could revolutionise the Palestinian struggle. "We will call for a civil intifada, to bring the Palestinians onto the streets saying we will not accept the occupation… an intifada with no weapons, no stones," he said. Abu Ain says he sees Barghouti acting alongside Palestinian president Mahmoud Abbas, also known as Abu Mazen. "He is a good aide to Abu Mazen, not a replacement for him. Now Palestinian society doesn't accept just Abu Mazen as a leader. Abu Mazen needs a good tactician like Marwan behind him. Marwan will support him as president, but he will not be a candidate against him."

However, it is by no means certain that the rest of the Palestinian leadership shares this appetite for renewed confrontation. Abbas himself has long argued solely for the path of negotiations, rather than any armed struggle or popular resistance. Many Palestinians now openly say how much they regret the violence of the second intifada, which they believe was mistaken and set their cause back. Even Abu Ain admits mistakes were made. "We gave the OK to resistance by the gun against Israeli troops and settlers. We were against operations inside Israel, but it happened out of our control. We made a big mistake." Another mistake came after the 11 September attacks when Abbas had counselled the Fatah leadership to recognise the new diplomatic climate and immediately halt violence, but he was ignored. "It was another mistake," Abu Ain said. "People think in different ways."

It is notable that Barghouti has not pitted himself directly against Abbas as a candidate for future elections. He almost did in 2005, but backed down. This time he and his advisers say that he will not challenge Abbas and will only run if Abbas keeps to his promise to stand down at the next election, whenever that is, although for now the Palestine Liberation Organisation is likely to insist that Abbas stays in power.

However, not everyone sees an Abbas-Barghouti partnership emerging as easily as Abu Ain suggests. There are others in the party who might also vie for power, among them Mohammad Dahlan, a former security chief with a strong constituency in Washington, and Nasser al-Qudwa, a former Palestinian representative at the UN. Barghouti himself represents a younger force in the movement, which is eager to replace the ageing leadership.

Abbas's credibility is already weak: after winning the election five years ago on a promise of a negotiated peace deal he has nothing to show for it except yet more Israeli settlement growth. Some believe a major prisoner swap now would so benefit Hamas that it would spell Abbas's quick political demise. "It will destroy him," said Hani al-Masri, a respected Palestinian political analyst. "It will show the only people who can release real prisoners are Hamas, while he can't do anything. He will understand this is a sign by Israel to get rid of him, especially if Marwan Barghouti is released. Imagine if he nominates himself while Abu Mazen is still in power?"

One Palestinian opinion poll in August said if Abbas stood as Fatah's candidate for the Palestinian presidency against Ismail Haniyeh, a Hamas leader and former prime minister, he would win 52% to 38%. However, if it was Barghouti standing against Haniyeh he would win by a far larger margin, 62% to 31%. Such findings are not new and are glaringly obvious to the Palestinian leadership.

Barghouti writes frequently from jail. He wrote to a conference on Palestinian prisoners last week and called for a two-state solution, giving a taste of what he might stand for if freed. He advocated a return to his 2006 Prisoners Document as a basis for uniting Hamas and Fatah, which he sees as a priority. He also underlined the need for more "resistance".

"Anyone who is betting that the suffering that the Palestinians have endured will lead it to stop their struggle is wrong," he wrote. "That is because the Palestinian people, who have led the longest revolution in modern history and the two most significant uprisings any nation has known, has an ever-replenished fountain of resistance. They will defend and continue their legitimate struggle and resistance against the occupation."

All now depends on the secret negotiations over the Shalit prisoner swap, which restart tomorrow after a brief hiatus. Reports suggest there is still disagreement over which prisoners Israel is prepared to free, whether the list can include Barghouti, and what will happen to them once released. Sa'd Nimr, a Fatah official and close aide of Barghouti, insists he has been told by Hamas and by Egypt, which also mediates in negotiations, that no deal will happen without Barghouti's release. "The deal is going to happen because at the end of the day the Israelis are bound to set their soldier free," he said. "The question is when, how and who will be freed?"